AIF trustee liability and proportionality of sanctions remain central where scheme compliance defaults occur despite later corrective action.

A trustee of an AIF remains responsible for compliance with the placement memorandum and SEBI circular obligations even where an investment manager is appointed, because the trustee must still act with due diligence, fairness and prudence in relation to the trust and scheme. The successor trustee may also inherit that compliance responsibility on amalgamation. Where breach is established, regulatory directions must still be proportionate to the default and the surrounding corrective steps. On the facts described, the Tribunal treated the liability as made out but found the post-breach debarment excessive after the fund was wound up, assets were liquidated and proceeds distributed, so part of the restraint was reduced and part set aside.

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Issues: (i) Whether the successor trustee could be held liable for the scheme's non-compliance with the placement memorandum and the SEBI circular, including the failure to achieve the second and final closing. (ii) Whether the directions debarring the appellant from fresh AIF assignments and from associating with SEBI-registered intermediaries were proportionate to the violation.

Issue (i): Whether the successor trustee could be held liable for the scheme's non-compliance with the placement memorandum and the SEBI circular, including the failure to achieve the second and final closing.

Analysis: The circular distinguished between obligations cast on managers and those cast on the AIF, trustee and sponsor. The trustee was bound to exercise due diligence, maintain fairness and act prudently in relation to the trust and the scheme. The failure to achieve the second and final closing was not a mere commercial lapse attributable only to the investment manager; the trustee's responsibility was not extinguished by appointment of the manager. The successor trustee also stepped into the predecessor's position under the amalgamation scheme.

Conclusion: The appellant was liable in principle for the compliance failure, and the challenge on absence of trustee liability did not succeed.

Issue (ii): Whether the directions debarring the appellant from fresh AIF assignments and from associating with SEBI-registered intermediaries were proportionate to the violation.

Analysis: Although liability was upheld, the record showed that after SEBI initiated action the fund was wound up, assets were liquidated and the proceeds were distributed to investors. In that factual setting, the Tribunal found the impugned restrictions to be excessive and concluded that the ends of justice would be met by reducing and setting aside part of the directions.

Conclusion: The debarment from new AIF assignments was reduced to six months and the restraint from associating with SEBI-registered intermediaries was set aside.

Final Conclusion: The appeal succeeded only in part: liability on the merits was upheld, but the punitive directions were substantially moderated on proportionality grounds.

Ratio Decidendi: A trustee of an AIF remains responsible for statutory and circular-based compliance notwithstanding the appointment of an investment manager, and post-breach regulatory directions must be proportionate to the proved default and the surrounding corrective compliance.

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